Tuesday, March 27, 2012

Shale Gale: The Energy Equivalent of the Berlin Wall Coming Down and Best Reason to Be Bullish

1. Natural gas futures prices fell to another 10-year low today of $2.208 per million BTUs on the New York Mercantile Exchange, see chart above. In nominal dollars, that's the lowest price for natural gas since February 2002, and adjusting for inflation it's the lowest price since July 1995, almost 17 years ago.

2. Michigan-based Consumers Energy announced today that it will lower natural gas prices starting next month for 1.7 million customers by 13% -- welcome news in tough economic times and rising gasoline prices. Customers will save about $130 million in energy costs over the next year as natural gas prices drop to levels not seen in nine years. This long-term reduction in natural gas prices comes on top of lower fuel costs from the recent mild winter, saving a typical residential gas customer about $94 compared to the previous year.

"It's the most dramatic change that is happening beneath the surface of the U.S. economy today. As the rest of the world struggles with oil prices that are very expensive both nominally and in real terms, the U.S., thanks to new fracking technology, is enjoying natural gas prices that are plunging. Even as crude oil prices have surged over the past 13 years from $12/bbl to over $100, the price of natural gas in the U.S. is roughly unchanged on net. That means that natural gas has dropped by an astounding 85% relative to crude oil (see recent CD post here). We've never seen anything like this.

The U.S. now enjoys an incredible energy price advantage that not only is transforming industries (for example, it shouldn't be too long before we start seeing cars that run on LNG), but that should be an important source of growth for the entire economy. This could be the best reason to be bullish."

MP: As Robin West, chairman and CEO of PFC Energy, reminds us "This shale gale is the energy equivalent of the Berlin Wall coming down. This is a big deal."

23 Comments:

Natural gas followed oil on the uphill price slope, based on energy equivalence.

Oil is high as global supplies are controlled by oil-thug nations, such as Russia, Nigeria, Mexico, Venezuela, Iraq, Iran, Libya, Saudi Arabia etc etc etc. No Westerner wants to explore and develop oil in pig-states like those. ergo, supply is constrained.

But natural gas is different, and huge strikes are being made everywhere, including in nations not part of OPEC or governed by loonie-monkeys.

Ergo, higher natural gas prices lead to huge gluts of gas---just as George Gilder said. Do not worry about commodities prices. The free market, baby, it works every time (and there are precious few free markets in the aforementioned oil-thug nations).

Natural gas is now at about 1990s levels. What is "high" or "low" about that?

Get used to "low" natural gas prices. But only consider them low in relation to the supply-constrained oil price.

Even with oil ruled by turd-felon nations, oil prices may crack down in several years. People are changing their ways, buying higher mpg vehicles, and brining on biofuels and CNG and LPG vehicles. Iraq may go to 15 mpd, about one-sixth go global supply.

If you treat your customers to too many price spikes and shortages, guess what happens?

Total 2011 dry natural gas final costs to residential, commercial, industrial and electric utilities consumers of 22,300 billion cubic feet are ~$100 billion. Natural gas is less than 1% of a $15 trillion economy.

"...some shale gas fields are uneconomic in the current pricing environment, which explains why drilling activity has declined in the natural gas-rich Barnett Shale and Haynesville Shale.

But the articles largely ignore the economics of the Eagle Ford Shale and other unconventional fields that produce large amounts of high-value oil, condensate and natural gas liquids (NGL's) such as butane, ethane and propane.

In general, exploration and production firms have shifted production from dry-gas fields to liquids-rich plays that offer superior profitability.

NGLs can dramatically increase the profitability of some of America's largest shale fields."

But the articles largely ignore the economics of the Eagle Ford Shale and other unconventional fields that produce large amounts of high-value oil, condensate and natural gas liquids (NGL's) such as butane, ethane and propane.

The bigger picture is being missed. Some of the formations actually have hydrocarbons that can be extracted and brought to market directly. A few billion barrels of reserves are probably available to be developed at a reasonable profit if the producers stick to the core areas.

But the hype that Mark has been selling does not strictly stay with profitable reserves in core areas. It is dealing with total estimated resources, most of which are not economic and will never become reserves. That would mean a write down of 95% from the optimistic estimates that have been provided to people who have not been paying close attention to the exact language, the SEC reporting, and the various accounting rules. The promise of shale gas riches has clearly failed investors. There is no guarantee that shale liquids will turn out much better except for a few companies in the core areas of the best formation. By the way, from what I have been hearing the most promising locations are in California, not Texas or ND.

Shale gas will help power generation, space heating and related uses. Its impact as a replacement for liquid transportation fuels remains to be seen.

Also, many shale gas fields tend to be exhausted quite quickly, and constant drilling to replenish existing supply is needed. If prices remain depressed, it could cause supply to diminish quickly and prices to shoot up.

Admittedly, the scenario looks promising, but other countries with what were thought to be promising deposits, e.g., Poland, have been disappointed.

Admittedly, the scenario looks promising, but other countries with what were thought to be promising deposits, e.g., Poland, have been disappointed.

It is promising if you are a worker in the sector, a land owner who makes a killing by leasing land that will not produce gas at a profit, a seller of drilling equipment, or a driller making a killing while the going is good. But it certainly is not good for investors who see red ink everywhere and have to keep putting in cash to finance money losing operations. At the current price producers will have to write down more than 50% of their stated reserves. That will leave them with negative equity and technically insolvent.

Sure there will be reserve write downs at $2.20 mcf. And when Nat gas doubles to $4.40 mcf, or higher, all those reserves will be reinstated. The write downs will be a PHENOMENAL opportunity to purchase great assets on the cheap.Demand will steadily increase as entire fleets (Wal Mart, Fedex, UPS, etc.) convert to Nat gas as the refueling infrastructure is built out. Passenger vehicles, starting with pick ups will come to market fall 2012 followed by cars. Won't be overnight, but it WILL happen.I'm up on Clean Energy Fuels, WAY up on Westport Innovations, and have 6 other holdings connected to the nat gas boom that have all made money for me.I work in the Eagleford and have connections in the Haynesville, Barnett, Permian Basin, Baaken and other producing areas.If you're not making money, you're not buying the right stocks....

Saxa: That is an enviro-left propaganda piece. For a different view, try watching a presentation by the NY State Geologist:

http://youtu.be/6Jjb5akEsrI

copy of the Power Point presentation. You will want to download it and review it with the youtube vid:

www.glyfac.buffalo.edu/mib/course/marcellus/geologyblackshalests.ppt

Note: This guy is not a right-wringer. A blogger in upstate NY had to file a freedom of information request to get access to the video. The powers that be at the NY State Ed department embargoed the video.

your opinion that it is propaganda is not supported by evidence to the contrary, including that which is in the piece i linked to previously. ever see "gasland"? maybe you call it propaganda, i do not. for those who want to see it.... http://www.dailymotion.com/video/xhfvhy_gasland_news- i feel sorry for those in the world trampled by corporate greed in the world we live, it really needs to STOP. and labels left or right are just stupid lines in the sand that benefit no one except the power grabbers. we are talking human health issues not left/right factions.

Sure there will be reserve write downs at $2.20 mcf. And when Nat gas doubles to $4.40 mcf, or higher, all those reserves will be reinstated. The write downs will be a PHENOMENAL opportunity to purchase great assets on the cheap.

It won't be a great opportunity for the shale producer investors. For one, most shale producers will be wiped out because their liabilities will not go away. They have way too much debt and no hope of profit even if prices go to $6 per Mcf. The profits will come from the purchase of conventional producers who can make a profit even at low prices, the tar sands players who have decades of reserves left, and the coal producers who will finally rid themselves of the headwinds that the gas producers helped create by funding the discredited AGW and green energy crowd. What is missed by most people is the fact that the oil and gas sector has been funding AGW hype to get Congress to help them deal with the competition from cheaper coal.

your opinion that it is propaganda is not supported by evidence to the contrary, including that which is in the piece i linked to previously. ever see "gasland"? maybe you call it propaganda, i do not.

It is what it is, not what you hope it to be. Fracking is not a big issue when it comes to water pollution except in cases where idiot companies don't handle their tailings and holding ponds properly or fail to treat wastewater as they should. What will kill off the shale energy scam is the lousy economics. Other than for some core areas in the best formations most shale production uses more energy than it produces.

and one would think that "It looked like the mountain was bleeding." would be of interest to a great many news sources, not just LinkTV.

"Those trucks driving through town sure are noisy" is "evidence" of ...what?

What I DO see in the video is a lot of people seeing dollar signs from big settlements if they can whine loud enough.

Methane in drinking water occurs in many places, and is a result of being in an area where there is a lot of gas in the ground. That IS, after all, why the drillers have chosen that location, and doesn't by itself indicate a problem caused by fracking.

By the way, one of the examples of ignitable faucet water seen in your favorite movie "gasland", is in Colorado, nowhere near any gas drilling activity, and not related to the fracking locations being shown.

To be credibile, it's necessary to maintain objectivity and integrity, and not include phony baloney claims.

As to hazardous chemicals seeping into an aquifer, I believe there is 1 (one) documented case. While this is certainly something to be concerned about and investigate fully, it doesn't exactly warrant the hysteria seen in that propaganda piece "Fracking Hell".

screw the flaming faucets, i am talking about poisons injected under high pressure into the ground/rock as part of the fracking method then when it shows up in drinking water wells and people and animals are illed by it it's "not exactly serious epidemiological evidence" for you the cheerleaders, to be credibile, it's necessary to maintain objectivity and integrity, and infront of us all drink the water from a well that comes up bad after fracking contamination from a nearby site. drink up or SHUT UP.

"screw the flaming faucets, i am talking about poisons injected under high pressure into the ground/rock as part of the fracking method then when it shows up in drinking water wells and people and animals are illed by it it's "not exactly serious epidemiological evidence"

Well, we know there's one documented case of this happening, are there more?

"for you the cheerleaders, to be credibile, it's necessary to maintain objectivity and integrity, and infront of us all drink the water from a well that comes up bad after fracking contamination from a nearby site. drink up or SHUT UP."

If you can find one, other than the one we already know about, let's see it, but I've gotta say, you're not making much sense. No one wants to drink poisoned water, but you need to document a more serious and widespread problem than you have so far.

Such high drama and appeals to emotion are preventing other readers from taking you seriously. You need a better presentation.

As far as I am aware of, the contamination of nearly a dozen water wells in nearby Dimock, PA was caused by yearby hydraulic fracturing process. When people were able to light their water on fire, they were told that this was always the case but that they had never tried before. When benzene was discovered, they were told that it was a leak from a nearby gas station. In the end, after the gas company (Cabot Oil & Gas) initially supplied the affected homeowners with bottled drinking water only, they agreed to supply the affected homes with piped in water from a nearby non-contaminated aquifer if they would sign a gag to stop them from claims against the company. I believe it is was concluded that the fault in the "process" was with the casing of the well, but as the law suit remains sealed, the public can't be sure. (But it sure should be wary.) I think it is time that we ban closed legal settlements for cases which involve the welfare of the public and the environment. Too often the deep-pockets of corporations can buy silence and erase the public record of their accidents and malfeasance. In this globalized world, everyone, especially corporations, must take responsibility for protecting the environment. No one should profit from the earth without proving they can reliably and safely protect it.